At the end of the year, the time for the selection of auditors and audit of financial statements is also approaching. It is therefore worth considering how and at which points in the audit of the financial statements, auditors can provide the company with their well-worked added value and thus reduce the business risk of their business.
It is important that the owners, supervisory boards and boards of companies should be aware of these moments and in their own well understood interest and of the interests of the entity they are directed can benefit from them skillfully.
Review and recommendations of the internal control system
During the audit of the financial statements, auditors shall be required to review and evaluate the internal control system. The result of this review and evaluation are recommendations most often submitted after completion of the study in the form of an official letter to the Management Board.
Often, guidance on weaknesses and possibilities for improving internal control systems and also on company reporting systems and on how to improve them is provided by audit teams during the audit.
Auditors' recommendations in this respect are of particular importance to entities with a large number of repetitive transactions such as supermarket networks, wholesalers, tele-operators, telecommunications companies, banks and insurers.
It is worth remembering that auditors have the experience, knowledge and competence to undertake a full verification of the internal control system and to provide comprehensive recommendations on filling in gaps and improving the effectiveness of existing internal controls.
Such an overall analysis should be taken into account in particular by the large industry units mentioned above, where the risks arising from the malfunctioning internal control system are significant. Among them, special attention should be paid to the bodies responsible for setting up the Audit Committees.
For them, the review of the existing internal control system by the newly appointed Audit Committee would constitute an excellent start to the internal control monitoring process, which is known to include one from the basic statutory tasks of the Audit Committees.
A letter to the board.
At present, the solutions to the Directive are being implemented by Member States. In this respect in Poland, in August this year, the Ministry of Finance issued assumptions for the new "Act on Auditors and their Local Government and entities entitled to audit financial statements".
As mentioned above, the letter to the Management Board serves the auditor to formally pass on recommendations and suggestions for improvements which he has noticed during the audit of the financial statements. Although recommendations often concern the internal control system, they may also refer to:
- • identified tax risks,
- • the management of liquidity, profitability,
- • as well as operational issues such as the management of the payment of receivables, commodity turnover or distribution and the organisation of sales.
The specific value of these recommendations is due to the fact that they have been developed by a non-organised person and the position of experience resulting from work in many units and on many accounting and financial systems. Therefore, it is important to think calmly about the sense of their introduction and not to reject the ideas that are subject to it, but because of their sometimes too critical character.
Participation in annual inventory
The participation in the annual inventory required by the standard examination procedures is limited and consists mainly of observing the inventory procedures carried out by the company and calculating a representative sample of inventory goods.
Such participation is sufficient in most cases to identify evident shortcomings in the relevant procedures, which may cause a significant risk of material fraud and significantly distort the audited financial statements.
However, in specific cases, it is always possible to carry out an extended verification of the inventory carried out with particular regard to the specific risks arising from the industry, the nature of the entity's activities.
It is also possible that auditors undertake to conduct or carry out inventory on behalf of the client in a framework separate from the examination of the order. Due to the independence required in the audit, such orders shall be conducted by auditors other than auditors currently examining the financial statements.
Audit Opinion on Financial Statements.
It must not be forgotten that the greatest value resulting from the statutory auditor's work is the opinion itself, which confirms in all relevant aspects, inter alia, the correctness of the functioning accounts, the accuracy of the valuation of the balance sheet components and the performance account, as well as the completeness of the accounting of liabilities and reserves and of revenue and costs. While such an opinion is the result of careful examination procedures, it significantly improves the reliability of financial information and thus significantly reduces business risk.
Auditor – or just a verifier?
The above issues clearly show that it is worth that the management of the company should see in the statutory review not only the verifier, whose sole purpose is to fulfil the statutory obligation to provide a signed audit opinion, but also a partner on the way to improve the reliability and regularity of the information and financial system and internal control system for users not only outside but also inside the organization, i.e.: Management Board, Chief Accountant, Financial Director.
It must not be forgotten that the quality of the statutory auditor's work and the certainty that he will carry out the required procedures is in the best interests of the individual, and in particular of the accounting officers and the Management Board. This is particularly remembered by companies that, in practice, would like to say “on their own skin” that it is far more important than a “fast” study for extremely competitive remuneration and the absence of problems with the presence of the research team longer than a few days.
What does the European Union say?
The growing awareness of the important role of statutory auditor in improving the quality of financial reporting, including in macroeconomic terms, is also highlighted in EU Directive No. Directive 2014/56. The main provisions of the Directive aim in particular at:
- extending the content of the statutory auditor's opinion with specific descriptions of the key procedures and conclusions of these procedures; in particular, this objective should be ensured for entities of special public interest, in Poland referred to as JZP
- isolate supervision of auditors investigating JZP units (most important for the proper functioning of the economy) and make it fully independent of professional self-governments (associations, chambers) of auditors
- restrictions on the provision of services other than audit services to the auditors of the entity (especially in the case of auditors of public interest entities)
- additional requirements, procedures, justification for the selection of the auditor and communication with the statutory auditor by the Audit Committees in public interest units
At present, the solutions to the Directive are being implemented by Member States. In this respect in Poland, in August this year, the Ministry of Finance issued assumptions for the new "Act on Auditors and their Local Government and entities entitled to audit financial statements".
It remains to be hoped that the solutions developed will carry forward the key assumptions developed under the EU Directive, which are important for creating a mature, competitive and professional audit market in Poland. One which, by strengthening the trust of users of the reports financed for financial information and reducing the asymmetry between managers and investors of large companies (in particular those listed on the WSE), would allow the capital market to function smoothly, preserve the safety of economic trade and eliminate undesirable economic phenomena.
It is also important that, together with economic development and changes in law, the awareness of a sound survey and corresponding to this reliability should also be increased. Awareness of the owners and supervisory boards of companies that elect auditors is particularly important in this context.